Newsletter Recap

2010 was an interesting year. Certainly it was volatile; however, thankfully it was not 2007-2009 volatile. The following is a review the 4th quarter 2010. The quarter in brief. The consumer was the hero of the fourth quarter. In the last three months (and especially in the last six weeks), consumers opened their wallets and pocketbooks and grew more confident about the state of the economy. In Washington, the President and Congress collaborated to devise short-term fixes for America’s major tax issues. The Federal Reserve announced plans for another round of monetary easing. There were signs of hope for the housing market, but also signals that home prices had yet to bottom out. We didn’t see a reduction in unemployment. Yet when all was said and done, the S&P 500 had gained 10.20% for the quarter.1 Domestic economic health. In December, the Commerce Department told us that consumer spending accelerated to an annualized pace of 2.4% during the third quarter. It improved by 0.7% in October and 0.4% in November – meaning five straight months of increases. By the end of December, the Reuters/University of Michigan consumer sentiment index indicated a peak of confidence among consumers unseen since June. Retail sales increased by 1.7% in October and 0.8% in November, Commerce Department figures indicated. MasterCard's SpendingPulse eCommerce Index measured a 15.4% increase in year-over-year online sales between October 30 and December 23. By December, chief economists at Wall Street firms had revised their estimates of 4Q 2010 consumer spending upward – Morgan Stanley forecast +4.4%, JPMorgan Chase +4.0% and IHS Global Insight +4.2%. All consumers could rejoice about the tax accord struck in the nation’s capital in December. The fight over extending the Bush-era tax cuts to the wealthiest Americans turned out to be little more than a skirmish. Following a compromise between President Obama and Congressional Republicans, the 2010 Tax Relief Act became law on December 17. It extended the Bush-era tax cuts for all Americans through 2012, cut (employee) payroll taxes by 2.0% for 2011, and extended federal unemployment benefits for another 13 months. It also brought back the estate tax at 35% with a $5 million individual exemption.

The Federal Reserve decided to use one of the few options it had left to try and stimulate inflation and the broad economy. In early November, it said it would buy $600 billion worth of Treasury bonds by mid-2011, and it stated plans to purchase up to $900 billion in debt by the end of 3Q 2011. The possible effects: lower long-term interest rates, lower bond yields and a weaker dollar, all factors which could make equities and real estate more attractive investments. Detractors saw the potential for stock and commodities bubbles - and a trade war, as U.S. exports could become cheaper as a consequence.

The jobless rate was 9.6% in October and 9.8% in November. Yet by Christmas, initial claims had fallen to a seasonally adjusted 388,000, 40.4% below the recessionary peak of 651,000 reported by the Labor Department in March 2009.

America’s manufacturing and service sectors appeared healthy, at least by the twin surveys at the Institute for Supply Management. Its December reports found the service sector rate of expansion improving 2.1% in December to 57.1% and the manufacturing sector rate of expansion improving 0.4% to 57.0 for December. The service sector had been expanding for the past 12 months. Global economic health. In Europe, the big news of the quarter concerned debt ratings. Moody’s Investors Service slashed Ireland’s credit rating by five levels in mid-December, and both Moody’s and Standard & Poor’s indicated that Portugal could be in line for a downgrade. Spain’s credit rating and Greece’s bond rating were also put up for review by Moody’s. S&P lowered its debt rating of Belgium late last month, while Fitch downgraded the credit rating of Hungary (not an EU member) to just above junk status. In the Asia Pacific region, all eyes were on a) China’s central bank and b) the continuing tension between North Korea and South Korea. In October, China reported its annualized growth slowing to 9.6% in the 3Q with inflation hitting its highest level in two years in September (3.6%). China’s central bank raised its benchmark interest rate twice in the quarter; at this writing, it is 5.81%. We learned third-quarter growth had been very strong in India (8.9%) and even in Japan (4.5%). Economies across the region grew worried about the Fed’s bond-buying initiative, with its potential to boost the risk of asset bubbles and inflation. World markets. The 4Q saw most of the world’s benchmarks adding to YTD gains. England’s FTSE 100 rose 6.3% in the quarter and the broader Dow Jones Stoxx Europe 600 advanced 6.2%. The Nikkei 225 was up 9.2% for the quarter, and Taiwan’s TAIEX rose 8.9%. Gains like these resulted in some very pleasant year-end numbers for some notable indices: South Korea’s KOSPI, +21.9%; Mexico’s IPC All-Share, +20.0%; India’s Sensex, +17.4%; Germany’s DAX, +16.1%; Canada’s TSX Composite, +14.4%. Other indices racked up lesser annual gains (FTSE 100, +9.0%; Hang Seng, +5.3%; Bovespa, +1.0%). Some indices slipped for 2010, even after a good 4Q: the Australia All Ordinaries index (-2.6%), the Nikkei 225 (-3.0%), the CAC-40 (-3.3%) and especially the Shanghai Composite (-14.4%). The MSCI World Index had an +8.55% quarter en route to a +9.55% 2010 return, and the Emerging Markets Index posted a 4Q return of +7.05% to go +16.36% for the year.

When considering your investments, one of the lessons in the Bible is explained by King Solomon is the book of Ecclesiastes: Send your grain across the seas, and in time, profits will flow back to you. But divide your investments among many places, for you do not know what risks might lie ahead. When clouds are heavy, the rains come down. Whether a tree falls north or south, it stays where it falls. Farmers who wait for perfect weather never plant. If they watch every cloud, they never harvest. Just as you cannot understand the path of the wind or the mystery of a tiny baby growing in its mother’s womb, so you cannot understand the activity of God, who does all things. Plant your seed in the morning and keep busy all afternoon, for you don’t know if profit will come from one activity or another—or maybe both. Ecclesiastes 11: 1-6. One more point; some of us are getting nervous watching the world news reports. Remember that the Lord is still in control. The Bible tells us that: … For all authority comes from God, and those in positions of authority have been placed there by God. Romans 13:1b

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by APW Capital. Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.

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All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.